CNY Premium on the Rise

It has been a while since we have seen BTCCNY trading at a premium to BTCUSD, but now we are seeing numbers climbing up to 1.8%. Late last year, we saw premiums driving up over 2.5% which lead to the infamous bull run to $504. Is this the first sign of a renewed interest in Bitcoin?

The mainstream school of thought is that given the capital controls in China, Bitcoin is the perfect tool to legally move money out of China. However, that is unlikely the case given the number of loopholes available to the Chinese, such as faking import invoices, swiping your UnionPay card 200x or even legally investing in businesses in the US via the EB-5 visa program. Furthermore, I spoke with a few funds here in New York that were interested in dabbling in Bitcoin as a way of investing in the US for Chinese customers. What was interesting was that they informed me their clients would only be willing to pay about 75bps as cost, given other ways of moving cash out of China is cheaper and ‘simpler’. With a premium close to 2%, slippage, market impact cost, and trading fees, you can start to see that it becomes quite expensive to convert CNY into USD using Bitcoin.

Having said that, could it be renewed interest in Bitcoin from the Chinese? Unlikely given the state of the market right now and with Ethereum and DAO taking all the spotlight. A more plausible theory is related to USDCNH and devaluation expectations. After the PBOC took its break of devaluations in January, there is a renewed expectation that we could be seeing some this coming Summer.

When an official announcement is made from the PBOC, much-welcomed volatility will come back into Bitcoin. Given the cheap basis on June and September contracts, the trade recommendation is to long either June or September and hedge with the XBTUSD swap. Thus if we see a strong, sudden deval we should expect a good FOMO to occur in Bitcoin. Happy Trading!